| The Sunday Times Economic Analysis By the Economist | ||||||
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Gathering
more revenue vital Yet given the current political situation, the external shocks that we are facing and the inability of governments to cut down on expenditure this strategy remains unrealistic. Whether Budget 2005 will achieve a higher revenue collection remains uncertain, almost unlikely. Successive governments have realized the need for higher revenue collection. Some of the measures adopted to gain revenue have misfired. In fact they have had the opposite results. The introduction of VAT and GST are good examples of such failures. Governments have also adopted another technique that has succeeded in developed countries of reducing the rate of taxation to enhance tax compliance. This has also not succeeded. The conditions in the United States and Sri Lanka are widely different. So we have had the spectacle of the tax: GDP ratio declining and reaching a low unacceptable level of below 16 per cent of GDP. If revenue is to be increased then the three requirements are the broadening of the tax base, adoption of a system of taxation that is consistent with the capacity to collect them and the increased efficiency of the tax collection authority. All three are no doubt part of the efforts of the government. What measure of success these would achieve remains to be seen. The least likely measure of success may well be the enhancement of efficiency in the tax administration. If this is accepted then the other two strategies must be adapted in consideration of such recognition. In fact innovative taxation measures mean taxes that could be easily collected. Innovation does not necessarily mean new fangled taxes, but those that can be collected without harm to the country's economic performance. Taxes must increase revenues without being disincentives to work and investment. In the Sri Lankan context, a realistic approach must be the collection of taxes at source. The very small number of personal taxpayers makes this mandatory. To adopt measures that would increase the numbers of those paying taxes is logical yet unrealistic. The increasing number of vehicles, the sky-rocketing land values in Colombo and the suburbs, the flourishing sales outlets for high value fashionable wares, housing construction and conspicuous consumption in Colombo are indicative of a prosperous class of persons. The number of tax dodgers is easily perceived when one compares these lifestyles with the paltry number of tax files in the Department of Inland Revenue. Indirect taxation has the means of raking some of the revenues from these sources. Increased taxation of luxury goods is an effective means. Similarly taxation at source must be resorted to in many more cases. A case in point is the inability to collect taxes from interest incomes. Efforts to impose a tax at source on interest incomes did not succeed owing to the number of loopholes in the system and the political unpopularity of such taxation. We even had the spectacle of a former Finance Minister apologetically explaining that it does not apply to amounts below a certain amount and his economist deputy explaining on television on how to evade the tax by distributing the deposits in several bank accounts! The Sri Lankan population must be educated to understand that the low level of services in the country, the lack of money for the government to undertake needed expenditures both of a social and economic nature and the inability to make a decisive impact through public investment is owing to the lack of revenue. Taxation is the means by which the government obtains its revenue. If people evade taxes then they cannot expect the government to provide services or to play a developmental role. Equally important is the need for the government to be prudent in its expenditure to make the argument for higher taxation credible. Will Budget 2005 provide the basis for higher revenue collection? |
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